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Fitch: US double-dip would cut global growth by 2 percentage points

Fitch Ratings unveil new world GDP calculations based on impact of a hypothetical US double-dip recession

Fitch Ratings has revealed that under the hypothetical US double-dip scenario, world GDP would be a minimum 2.1 percentage points (pp) lower compared with Fitch's baseline scenario on a cumulative basis for 2011 to 2013.

In Fitch’s new report What if the US falls back into recession, the ratings agency says that world GDP growth would be 0.3pp lower than the baseline in 2011, 1.2pp lower in 2012 and 0.7pp lower in 2013.

The new report, simulated the effects of a hypothetical double-dip recession in the US on the global economic recovery, estimates US growth would fall to 1% in 2011, negative 0.6% in 2012 and 1.5% in 2013. It also presents a country-by-country analysis of the effects, mainly on the impact through trade channels.

Fitch analysts say “the study does not seek to quantify second-round effects resulting from heightened risk aversion, which would likely have an additional material effect on the global economy.”

Fitch recently lowered its forecasts for US growth from 2.6% to 1.8% in 2011 and from 2.8% to 2.3% in 2012, following official data revisions and a raft of weak economic indicators.

“With the emergence of consumer retrenchment in the context of weak labour and housing markets, and a re-intensification of financial market stress related to the euro area crisis, market concerns over the chance of the US tipping back into recession have increased,” says Maria Malas-Mroueh, director in Fitch’s Sovereign Group in London.

At the same time as the hypothetical calculations of world GDP under a US double-dip recession, a subsequent contraction in global oil demand would lead to a decline in oil prices to around $90 per barrel (bbl) in 2012 and $85/bbl in 2013, against Fitch’s baseline projection of $100/barrel for 2012 and 2013.

On a cumulative basis during 2011 to 2013, Fitch says the euro area, UK and Japan will slow by 1.6pp, 0.7pp and 0.9pp against the baseline respectively, but the full effect on big advanced economies may well be larger due to second-round effects.

With Fitch’s baseline growth projections at below 2% for the euro area and UK in 2011 and 2012, and at 0.5% for Japan in 2011, the risk of a US downside scenario tipping the MAEs into recessions is not negligible.

The ratings agency says that China will be the worst hit.

“Overall, small and open emerging Asian economies with extensive trade links to the US and China would suffer the steepest declines in output in the 'double-dip' scenario, while in central and eastern Europe, growth would weaken mainly as a result of slower euro area growth and heightened global risk aversion,” the report says. “China real GDP growth would slow to the below-potential level of 7% in 2012 and 2013, with repercussions extending to the rest of the world.”

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